VAT  LEAKAGE  LEADS  TO  P117-B  LOSS  FOR  GOVERNMENT

MANILA, June 17, 2005
 (STAR) By Des Ferriols  - The government has lost over P117 billion over the last two years from leakages in the value-added tax (VAT) system, the National Tax Research Center (NTRC) said.

The NTRC said the administration of VAT, considered as one of the most efficient tax collection scheme in most economies, is only beginning to catch up to the leakages that have not been plugged early on.

NTRC director Lina Isorena told reporters that historically, the Bureau of Internal Revenue (BIR) has been able to collect up to 70 percent of the collective VAT revenue because of numerous exemptions and outright tax evasion.

According to Isorena, the BIRís clean-up program has led to the discovery that businesses often understate their sales by as much as 90 percent while overstating their deductibles to reduce their VAT base.

In 2002 and 2003, Isorena said the VAT leak was estimated at 30 percent as the BIR collected only P135 billion. The foregone revenues rose slightly to 32 percent in 2004, resulting to total collections of P139 billion.

As a result, the VAT leakages cost the government about P57.85 billion in foregone VAT collection in 2003 and about P59.571 billion in 2004, for a total of P117.42 billion over the two-year period.

Isorena said the foregone revenues include various exemptions enjoyed by industries located in the special economic zones around the country where locators are allowed more deductions and exemptions.

"Of course these industries have economic multiplier effects that ultimately translate to higher collection elsewhere in the revenue chain," Isorena pointed out. "But upfront, we have to forego some of the VAT revenues."

If the two percentage-point increase in the VAT rate is implemented next year, Isorena said the percentage of revenue foregone would change but she said the NTRC has yet to finalize the ultimate impact of the new law and whether new leaks would spring.

Aside from the increase in the VAT rate, the Arroyo administration is also setting out to trim down the investment incentives that would ultimately limit fiscal exemptions to so-called footloose industries.

Initially, the Department of Finance said fiscal incentives should be limited to industries such as business process outsourcing (BPO) and call centers, electronic and semiconductor companies, and other businesses where government incentives would be the deciding factor between leaving or staying put.

Finance Secretary Cesar V. Purisima told reporters yesterday that the rationalization of fiscal incentives would be taken up in Congress next and the Arroyo administration intended to limit these incentives to businesses that would otherwise go somewhere else if no incentives were offered.

"Tax revenues have not been growing as fast as GDP (gross domestic product) and we need to find out why," he said. "We already know that we need to increase our revenues immediately by at least 2.5 percent of GDP simply to get out of our present situation."

Purisima said government revenues should rise to at least 15 percent of GDP to give the government a chance at putting its debt burden at manageable levels while still spending on development projects with the necessary economic multiplier effects.

"For industries that are going to come here and stay anyway, incentives would not be the determining factor in investment decisions," he said. "The harmonization of fiscal incentives against the need to raise revenues would depend on the balance of these considerations."


Reported by: Sol Jose Vanzi

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